CFA Institute CFA-LEVEL-1 Online Practice Questions and Exam Preparation

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1251:

  Which of the following best describes the distinction between expenses and losses?

  A. Losses result from peripheral or incidental transactions, whereas expenses result from ongoing major or central operations of the entity.
  B. Losses are extraordinary charges, whereas expenses are ordinary charges.
  C. Losses are reported net of related tax effect, whereas expenses are not reported net of tax.
  D. Losses are material items, whereas expenses are immaterial items.
  E. None of these answers.
  A. Losses result from peripheral or incidental transactions, whereas expenses result from ongoing major or central operations of the entity.

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  Explanation

  Expenses are outflows or other using up of assets or incurrence of liabilities from delivering or producing goods, services or key operations. Losses are defined as decreases in equity (net assets) except those that result from expenses or distributions to owners.

• Question 1252:

  If the OTC-to-NYSE volume is high, the contrarians interpret it as implying that investors are:

  A. bullish.
  B. about to enter the market with more cash.
  C. aggressive.
  D. bearish.
  A. bullish.

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  Explanation

  Since the OTC market is dominated by small stocks which are riskier than the large stocks on NYSE, a high OTC volume relative to NYSE (above 110-112%) implies that investors are bullish. Of course, since the contrarians bet against the market at market turning points, they will consider this behavior by investors as a bearish signal if the market is at a high.

• Question 1253:

  Which of the following constitutes an example of a cost which is not incremental, and therefore not relevant in an accept/reject decision?

  A. A firm has a parcel of land that can be used for a new plant site or, alternatively, can be used to grow watermelons.
  B. All of these are examples of incremental cash flows, and therefore, relevant cash flows.
  C. A firm orders and receives a piece of new equipment, which is shipped across the country and requires $25,000 in installation and set-up costs.
  D. A firm can produce a new cleaning product that will generate new sales, but some of the new sales will be from customers who switch from another product the company currently produces.
  E. All of these are not examples of incremental cash flows.
  B. All of these are examples of incremental cash flows, and therefore, relevant cash flows.

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  Explanation

  These are examples of opportunity costs, externalities or installation costs and are all incremental cash flows.

• Question 1254:

  The Investment Company Institute reported in its Mutual Fund Fact Book that the number of mutual funds increased from 410 in 1985 to 857 in 1995. What is the geometric mean annual percent increase in the number of funds?

  A. 48.66
  B. None of these answers
  C. 1.12
  D. 19.41
  E. 7. 65
  E. 7. 65

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  Explanation

  There are 11 years involved. The geometric mean = [(1 + 857/410)^1/10]-1. In words, it is the 10th square root of (1 + 857/410) minus 1. So we have GM = (1 + 2. 09)^(1/10) - 1 = 0.0765 = 7. 65%

• Question 1255:

  Assume you buy a car for $18,000 today and agree to pay $250 a month, beginning next month, for 5 years with a final payment also due 5 years from today to pay off any remaining balance. How large will that final payment be, if interest accrues at 2. 9% per year, compounded monthly?

  A. $3,000.00
  B. $4,683. 97
  C. $4,280.77
  D. $9,690.32
  E. $1,204. 41
  B. $4,683. 97

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  Explanation

  There are 60 months in 5 years. This is a problem known as a balloon payment. On the BAII Plus, press 60 N, 2. 9 divide 12 = I/Y, 18000 PV, 250 +/- PMT, CPT FV. On the HP12C, press 60 n, 2. 9 ENTER 12 divide i, 18000 PV, 250 CHS PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 1256:

  The following facts apply to your company:

  Target capital structure: 50% debt; 50% equity.

  EBIT:$200 million

  Assets:$500 million

  Tax rate:40%

  Cost of new and old debt:8%

  Based on the residual dividend policy, the payout ratio is 60 percent. How large (in millions of dollars) will the capital budget be?

  A. $43. 2
  B. $50.0
  C. $108.0
  D. $86. 4
  E. $64. 8
  D. $86. 4

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  Explanation

  Debt = 0.5(Assets) = 0.5($500) = $250 million.

  Interest = 0.08($250) = $20 million.

  EBT = EBIT - I = $200 - $20 = $180.

  NI = $180 - Taxes = $180 - $180(0.4) = 0.6($180) = $108 million.

  Dividends = $108(0.6) = $64. 80 million.

  Retained earnings = NI - D = $108.00 - $64. 80 = $43. 20 million.

  Half of the capital budget will be debt, half will be common equity from retained earnings, so the capital budget will = $86. 40 million.

• Question 1257:

  Intelligent Semiconductor, a diversified technology company, is considering two mutually-exclusive projects. Assume the following information: Project A Initial cash outlay: ($500,000) t1: $125,000 t2: $125,000 t3: $155,000 t4: $285,000 Cost of capital 11.35% Project B Initial cash outlay ($395,000) t1: $170,000 t2: $160,000 t3: $175,000 Cost of capital 11.35% Assuming no taxes, a $0.00 salvage value at the end of each projects' life, and the ability for each project to be replicated identically, identify the superior project according to the Replacement Chain approach. Additionally, what is the NPV and IRR of the superior project over the common life?

  A. Project B, NPV $25,577. 90, IRR 13. 30%
  B. Project A, NPV $18,954. 46, IRR 10.33%
  C. Project B, NPV $35, 417. 16, IRR 15. 67%
  D. Project B, NPV $35,417. 16, IRR 13. 30%
  E. The Replacement Chain approach cannot be applied to these projects.
  F. Project A, NPV $22,256. 14, IRR 12. 22%
  D. Project B, NPV $35,417. 16, IRR 13. 30%

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  Explanation

  The Replacement Chain, or "Common Life" approach, is a useful analysis method which allows two or more projects with unequal lives to be examined. In the Replacement Chain approach, the lifespans of each project being examined are multiplied in such a way that the resulting projects share a "common life." In this example, Project A has a lifespan of 4 periods, whereas Project B has a lifespan of 3. The common multiple of both is 12, and to transform each project into one which has a twelve period lifespan, multiply project A by 3 and Project B by 4. Doing so will result in the following series of cash flows for Project A: Project A t0 ($500,000) t1: $125,000 t2: $125,000 t3: $155,000 t4: [$285,000 + ($500,000)]=($215,000) t5: $125,000 t6: $125,000 t7: $155,000 t8: [$285,000 + ($500,000)]=($215,000) t9: $125,000 t10 $125,000 t11: $155,000 t12: $285,000 Multiplying project B by 4 will result in the following cash flows: t0 ($395,000) t1: $170,000 t2: $160,000 t3: [$175,000 + ($395,000)]=($220,000) t4: $170,000 t5: $160,000 t6: [$175,000 + ($395,000)]=($220,000) t7: $170,000 t8: $160,000 t9: [$175,000 + ($395,000)]=($220,000) t10: $170,000 t11: $160,000 t12 $175,000 Solving for NPV and IRR will determine that Project B is superior on both figures, with an NPV of $35,417. 16, and an IRR of 13. 301%. Project A has a NPV of $22,256. 14 and an IRR of 12. 22%.

• Question 1258:

  James Martindale, CFA, manages a small mutual fund specializing in defensive equity investments. Martindale has purchased 10,000 shares of BLM stock for the portfolio after deciding that the stock would contribute to meeting the fund's objectives. Which of the following characteristics would make BLM stock suitable for Martindale's mutual fund?

  A. A high beta.
  B. Low systematic risk.
  C. Higher rate of return than other stocks with similar risk characteristics.
  B. Low systematic risk.

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  Explanation

• Question 1259:

  A random sample of 85 group leaders, supervisors, and similar personnel revealed that on the average a person spent 6. 5 years on the job before being promoted. The standard deviation of the sample was 1.7 years. Using the 0.95 degree of confidence, what is the confidence interval within which the population mean lies?

  A. 6. 99 and 7. 99
  B. 6. 49 and 7. 49
  C. None of these answers
  D. 4. 15 and 7. 15
  E. 6. 14 and 6. 86
  E. 6. 14 and 6. 86

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  Explanation

  Interval estimate can be found from x_bar +/-z*s/(n^0.5). Here we have n = 85, x_bar = 6. 5 and z = 1.96 (for 95%) and s = 1.7. Therefore 6. 5+/-1.96*1.7/9.22 and we get 6. 14 and 6. 86.

• Question 1260:

  You run a mutual fund that holds 24 stocks. Each week, you intend to comprehensively review 3 of them. Assuming this is the first week you are doing this, how many ways can you choose 3 from the 24?

  A. 2,024.
  B. 1,492.
  C. 1,024.
  D. 2,048.
  A. 2,024.

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  Explanation

  The combination, or binomial formula, gives the number of ways that k objects can be chosen from n items, without regard to the order of choosing. The formula is n_C_k = (n choose k) = n! / [k! *(n-k)!]. In this case, we have (24 choose 3) = 24! / [3! * 21!] = (24 * 23 * 22 ) / (6!) = 2,024.